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Good idea to increase taxes to balance the budget?

By Megan Schneider

On May 1, 2011

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Fox News recently said, "a new Tax Day study showed that if Washington wanted to balance the budget, using tax increases alone, rates would have to more than double across the board — including on the middle class — to keep up with federal spending."

Economic and finance professors at the University of Maryland think the current budget gap cannot be closed through tax increases alone and Fox's article is simply "a red herring."

"The Fox News report was trying to make the point that at the current trajectory of spending, taxes would have to rise by a significant amount absent any material federal belt tightening," said Professor Clifford Rossi, the executive-in-residence for the Center for Financial Policy. "I think it is important to realize that there is a lot of political maneuvering on both sides of this issue including the various media sources so one has to be careful parsing through what is hubris and what is fact."

Regarding President Obama's budget plan, Rossi wonders whether a plan for taxes actually exists. No concrete discussions have been made that offer a tax plan as well as a layout for spending.

"The President's plan to narrow, but not to close the budget deficit, would increase taxes only on people who earn at least $250,000 annually," said economics Professor Robert Schwab. "The Republican proposal has no tax increases, and in fact has substantial tax cuts."

Whether a tax plan is enforced or not, questions of what will be changed still arise. If officials follow through with a tax plan, the individual income tax, estate tax, and corporate income tax will be affected.

"I do not see how we could possibly balance the budget without both increasing taxes and reducing spending," said Schwab. "I think in the short run, efforts to balance the budget will harm the economy, but in the long run, it is essential that we do balance the budget."

Because the economy is still weak, appropriate fiscal actions must be taken. The government needs to be careful with any tax or spending plan because it cannot risk getting closer to the budget deficit, said Schwab.

"Responsible fiscal measures, not unlike managing personal finances, require that income matches expenses," said Rossi. "Both sides of that equation need to be addressed and unfortunately given the state of the economy and deficit, we face generational decisions regarding tax and spending policy."

Discussion of an increase in taxes raises doubt that doing so is not the right choice for Obama's administration.

"The administration has unfortunately sparked quasi class warfare by focusing too much attention on individuals with incomes over $250,000," said Rossi. "It certainly plays well for re-election politics and I guess if that was my objective it would make sense, but not as a long-term strategy to ensure the future for the next generation of taxpayers."